4
University of Michigan Consumer Sentiment Survey September 2001 through August 2008 Source: University of Michigan; Dismal.com Between Aug and Sept. 2005, the consumer sentiment index dropped 12.2 points, the largest one-month decline since December 1980.

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Market Update (cont.) Long term bond issuance through August was virtually flat with 2007 at approximately $295 billion. New bond issuance was strongest in Development, Environment, Health Care, Transportation and Utilities. Not surprisingly new issue weakness was led by housing followed by general purpose and education sectors.

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Market Update (cont.) In addition, variable rate (short put) issues saw the biggest increase (+220%) in year over year volume. Concurrently, issues backed by Letters of Credit increased by over 370% year to year from $10.9 billion to over $52 billion. While Long term bond issuance was virtually flat through August, municipal note issuance increased over 14% to over $36 billion at the end of August.

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Market Update (cont.) Safety was also a principal objective as issues backed by letters of credit and with variable rates (short put) increased substantially from 2007 levels. Leading sectors in note finance this year have been General Purpose and Education sectors. New money financing represented the bulk of note issuance while refundings represented the bulk of long term bond issuance this year.

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Outlook While the municipal bond market seems to have stabilized with the redemption of auction rate preferred issues by brokerage firms, the market will need the full government “bailout” to provide more stable liquidity. Investors continue to be risk averse and will stress safety of principal and liquidity. State and local government finances are facing increased budget deficits from revenue shortfalls and are also facing limits on new bond issuance.

21
Outlook (cont.) Increasingly programs will have to be cut. Many states have already raised taxes and property tax increases have peaked. We expect an increase in downgrades of state and local government credit ratings and in the credit ratings of agency and revenue bond issues. We expect interest rates to rise as a result of an increase in U.S. Treasury interest rates from increased deficit

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Outlook (cont.) Conversely, we expect either a repeal or major adjustment in the AMT tax that would benefit municipal bond investment. Likewise a rise in Federal income taxes which we expect will also increase the attraction of municipal securities.

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Conclusion In conclusion, the municipal bond market will face increasing supply from financially stressed issuers but increasing demand from investors seeking tax avoidance. However, investor selection of municipal debt will be more discriminating.